In order to be a successful investor, it is important to recognize the costs associated with investing. Commissions and fees charged by brokers to invest in stocks can really hamper a small investor like myself. For example, a $20 commission on a $1,000 investment accounts for 2% of the entire transaction. It is even higher on a $500 investment (4%)! That all but wipes out any kind of dividend return I may receive for owning a stock.
What is the Cheapest Way to Buy Stocks Online?
Since I have really been focusing on limiting my investment expenses, I thought it would be interesting to highlight the cheapest ways to buy stocks online. I currently use several methods to try and limit any commissions or fees associated with investing. By following these methods, I am able to improve my yield on cost as I build my dividend income portfolio.
Online Discount Stock Brokers
It is hard to differentiate between a discount and traditional online broker these days. There is a lot of competition out there, which is a benefit to the investor. For example, I have had a Fidelity account for years which offers lots of great investment tools and services. Their commissions are now set at $7.95 per trade, which is comparative to other low cost brokers.
I also have two other discount brokerage accounts that were opened last year, which include ING ShareBuilder and TradeKing. Both offer low commissions but tend to lack a little in the service they provide compared to my Fidelity account. The ING ShareBuilder account currently charges $9.95 per trade or $4 for automatic trades, while TradeKing charges $4.95 per trade.
Discount brokers have certainly lowered the overall costs of investing for investors like me. However, even a $7.95 commission on a $500 investment is about 1.6% of the entire investment, which is why I also use the direct stock purchase plan method listed below.
Direct Stock Purchase Plans
The cheapest way to buy stocks online that I have found is by investing directly through the company. A direct stock purchase plan (DSPP) allows investors the chance to purchase shares directly from the company in which they are investing in, or through a transfer agent. Some of these company managed plans charge a commission while others are free.
Here are two examples of stocks that I own where I don’t pay any commission when buying new shares. By setting up an automated purchase plan through the company’s DSPP, I can buy stocks online with no commissions for fees.
- Clorox (CLX) – Purchased through Computershare, a third party transfer agent, I now invest $100 per month in CLX shares. These shares are purchased through an automated investment plan and I don’t pay any commission. Being a small investor, this is a nice way to stretch my investment dollars and avoid paying fees and commissions.
- Cincinnati Financial (CINF) – Instead of buying stock via a transfer agent, Cincinnati Financial shares can be purchased directly through the company. Each month I invest $100 into purchasing shares of CINF without paying any commission to a stock broker. By limiting my costs and reinvesting my dividends, I am able to stretch my investment dollars further than investing through a stock broker.
Note – Not every direct stock purchase plan is free to invest in. Several companies still charge maintenance fees and commissions on new shares purchased, so be sure to investigate before buying any stock.
What is the cheapest way to buy stocks online that you have used to invest? Have you used a DSPP to limit your costs for investing?